Last night, Treasurer Scott Morrison released the 2018-2019 Federal Budget (Budget). In his speech, the Treasurer outlined five key principles which have shaped the development of this Budget:
- Provide tax relief to encourage and reward working Australians;
- Back business to invest and create more jobs;
- Guarantee essential services for all Australians;
- Keep Australians safe; and
- Ensure the Government lives within its means.
The full budget papers are available at www.budget.gov.au. Keeping in line with the Government’s focus, a taxation ‘speed limit’ will be introduced to ensure tax revenues do not exceed 23.9% of gross domestic product.
We outline below an overview of the key tax initiatives and changes proposed.
- Deductibility of wages: From 1 July 2019, businesses who do not remit amounts required to be withheld from payments to employees or contractors (eg non-compliance with Pay As You Go reporting and withholding requirements) will no longer be entitled to claim a deduction for the amount they pay their employees or contractors.
- Tax consolidation: Simplified integrity measures for businesses participating in the tax consolidation regime will be introduced. These measures relate to movement of assets amongst multiple consolidated groups to generate multiple deductions, and, deferred tax liabilities and tax cost setting.
- Division 7A: Division 7A and unpaid present entitlement (UPE) laws will be clarified to ensure UPEs are specifically captured and subject to ordinary rules.
Small business measures
- Instant asset write off: The instant asset write-off allowing a deduction of up to $20,000 per depreciable item will be extended for business with a turnover of up to $10 million for an additional year and ending 30 June 2019.
- Small business CGT: Partnerships that enter into ‘Everett assignments’ will no longer be able to apply small business concessions to any capital gains which arise from the assignment of future income.
- MITs / AMITs: Managed Investment Trusts (MITs) and Attribution MITs will no longer be able to apply the 50% capital gains tax (CGT) discount at the trust level. This change is to ensure these trusts operate as genuine flow-through vehicles and to prevent investors that are not entitled to the CGT discount from receiving a benefit from the discount being applied at the trust level. Relevantly, investors will still be able to apply the CGT discount in accordance with the current rules.
- Stapled structures: Confirmation that the previously announced tax reform to the taxation of trusts in certain stapled structures will proceed.
- Trust distributions: Anti-avoidance rules to address ’round robin’ trust arrangements that enable income to be returned to an original trustee tax free will be introduced.
- Testamentary trusts and minors: The preferential tax treatment of minor’s income from testamentary trusts will be clarified to ensure only income derived from the assets of the deceased will be subject to the adult tax rate.
- Image rights: Image rights will no longer be able to be split through trusts. Any income derived from licensing a person’s fame or image will be taxed at the individual level.
- Significant Global Entity definition: From 1 July 2018, the definition of a “Significant Global Entity” (for the purposes of the Multi-National Anti-Avoidance Law, Diverted Profits Tax and Country-by-Country reporting) will be expanded to include more large private groups of companies and multinationals.
- MIT withholding: Countries eligible for the concessional rate of withholding from Managed Investment Trust distributions to foreign investors will be expanded by a further 56 countries. Withholding for investors of these countries will be halved to 15%. This is proposed to take effect from 1 January 2019.
- Thin capitalisation: Effective 1 July 2019, changes will be made to the thin capitalisation rules in relation to the value of assets used and classification of certain consolidated groups.
- Foreign pension fund and sovereign entities: Confirmation that the previously announced tax reform restricting the concessional tax treatment of foreign pension funds and sovereign entities will proceed.
- Research and Development Tax (R&D Tax) Incentive: Substantial changes have been proposed to the R&D tax incentive, commencing 1 July 2018. Companies with annual turnover of $20 million or more will be subject of more rigorous tests to be eligible for greater R&D concessions.
The benefit available under the R&D tax incentive will be linked to the level of ‘R&D intensity’, where the greater the ‘intensity’ of R&D the higher the percentage benefit available above the corporate tax rate (which will be the base benefit). There will also be with an increase in the annual expenditure cap (to $150 million).
For companies with annual turnover below $20 million, the R&D tax incentive will be a premium of 13.5% above the applicable corporate tax rate. Annual refundable amounts will also be limited to $4 million per annum.
- Film offset: Big budget movies will receive a location offset to support and encourage Australian film and bring international businesses to Australia for production.
Property and Real Estate related measures
- Vacant land deductions: Deductions for expenses related to holding vacant land will be denied. Any denied expenses may be able to be capitalised as a cost base item subject to certain conditions.
Excise and indirect taxes
- Tobacco importation: Importers of tobacco will be required to now pay all duties and taxes from 1 July 2019 upon importation, with some transitional arrangements for existing warehoused stock.
- Beer excise: Additional support will be provided to smaller craft brewers by extending the concessional draught beer excise rates to kegs of more than 8 litres from 1 July 2019.
- GST: GST will become payable by online hotel booking providers who are located off-shore from 1 July 2019.
- Luxury cars: From 1 July 2019, LCT will not apply on cars re-imported into Australia following a refurbishment overseas.
- Individual tax rates: A seven–year personal income tax plan will be implemented to provide relief from bracket creep by removing the 37% personal income tax bracket. Adjustments to the low income tax off-set mean low and middle income earners may be up to $1,000 better off depending on their circumstances.
- Medicare: The Medicare levy will remain at 2%.
- Veterans affairs: Certain supplementary payments made to veterans from 1 May 2018 will be exempt from income tax.
- Transition to retirement benefits: Amendments will be made to the transition to retirement income stream rules relating to the death of a member, and, addressing double taxation for deferred annuities purchased within the fund.
- Superannuation work test: Exemption from the work test for people ages 65-74 whose balances are less than $300,000. This will enable older Australians to make further voluntary contributions to their superannuation fund.
- Fees and charges will be banned: Certain fees and charges applied by superannuation funds will either be capped or banned.
Compliance and the Black Economy Taskforce
- More money for the Australian Taxation Office (ATO): The ATO will receive an additional:
- $20.1 million to ensure tax agents meet appropriate professional and ethical standards;
- $133.7 million in funding to pursue unpaid tax and superannuation debts;
- $318.5 million in funding to increase its compliance presence in respect of the Black Economy; and
- $130.8 million in funding to increase data matching and target poor compliance behaviours by tax agents.
- Taxable Payments Reporting System (TPRS) extended: Taxable Payments Reporting System notifications will extend to security services, road freight transport and computer design services.
- Director penalties extended: New penalties and laws will be introduced to combat phoenix behaviour by extending director penalty notices to goods and services, luxury car and wine equalisation taxes.
Each of these measures has not yet become law and may be open to further negotiation in the Senate. The HWL Ebsworth National Taxation Group will keep you updated on major developments in these areas as they occur.
Please contact a member of our tax team to discuss any aspect of the above further.
This article was written by Ari Schachna, Partner, Nima Sedaghat, Partner, Vincent Licciardi, Senior Associate and Alina Sedmak, Associate.
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